Types of Life Insurance for Physicians

Introducing The Physician’s Life Insurance Primer, a series explaining life insurance. This post introduces the basic types of life insurance and fundamental pros and cons of each.

Broadly speaking, there are two categories of life insurance, term insurance and permanent insurance, commonly known as whole life insurance.

Term Insurance

Term insurance is temporary in nature, and typically the most cost-effective in insuring large amounts of short-term risk. You are paying just for the cost of insurance, so the premium costs are very low. A term insurance contract typically renews every 5, 10 or 20 years with an escalating premium, and eventually expires between the ages of 70 and 85. Premiums typically escalate significantly as the insured ages, and most term policies lapse as the insurance becomes cost-prohibitive.
The most practical use of term insurance is for situations where you can be certain that the need for life insurance will not exist after a specific period of time. For example, if you need life insurance coverage to ensure the needs of your children are met through the time they graduate from college and are out on their own, your term coverage might only need to last until they complete college.

The problem with term coverage is that, if you determine that your need for coverage will last beyond your intended time frame, you would need to renew the term coverage or purchase a new policy which could result in substantially higher premium costs. And, if you develop any health conditions, you could be denied coverage.

Permanent Insurance

Permanent insurance is long-term in nature consisting of both a death benefit and a savings element.  A portion of your premium is allocated to a savings, or cash value account which accumulates interest tax-free. The growth of your cash value gradually reduces the risk to the life insurer which enables it to level out your premium and fix it for the life of the policy. Your premium will be higher on a permanent policy, but, if the cash value growth is guaranteed, it will never be increased, nor will your policy ever lapse as long as the premium is paid.
Permanent policies are used when the need for protection or capital will extend into well into the future. It’s often used in wealth transfer strategies, business planning situations, and where the need for income replacement extends beyond the dependency years of the children.

Read this: How to Avoid or Overcome Life Insurance Fraud

Types of Permanent Insurance

Permanent insurance can be further broken down into three sub-categories, Whole Life, Universal Life and Variable Life.

Whole Life

The oldest and most basic form of permanent life insurance, whole life insurance is a fixed, guaranteed product, meaning the face amount, premium and cash value growth are determined at issue and guaranteed for the life of the contract. Some insurers pay dividends which can be applied towards the premium payment or used to buy paid-up additions which can increase cash value growth and the face amount.

Universal Life

A permanent life insurance policy with flexibility of deposits and fewer guarantees. In return for greater flexibility and the opportunity to earn higher returns on interest, policyholders assume the risk of increasing insurance costs as well as the possibility that lower than expected returns could result in higher premium payments. A universal life policy allows for extra premium deposits as well as greater access to funds.

Variable Life

Variable life insurance allows the policy owner to allocate funds among different investment options, such as various types of stock and bond accounts. Although the separate investment accounts are subject to market fluctuations, the death benefit is guaranteed. Some variable life policies offer minimum return guarantees as options.

Within each of these sub-categories of permanent life insurance are a multitude of variations of each. The universe of different types of life insurance for physicians is vast, and should be explored with your specific circumstances in mind along with the guidance of a qualified life insurance professional.  Our Advisors can help you determine the best solution for your specific needs.
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